House Prices and Debt – Australia's Achilles Heel

This note looks at the outlook for house prices given the deterioration in the economic outlook over the last six months.

The key points are as follows:

- How house prices behave over the year ahead will likely be a key determinant of how well Australia weathers the global financial crisis and recession now embracing the rest of the world.

- Falling interest rates, increased home owner grants and a housing undersupply are positives for house prices. But these are more than offset by poor affordability, overvaluation, low rental yields and rising unemployment.

- On balance, we see average house prices falling another 10% to 15% over the year ahead. This in turn will put further downwards pressure on consumer spending and drive further sharp interest rate cuts from the Reserve Bank of Australia.

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